By James Davey
LONDON (Reuters) - Tesco (LSE:TSCO), the world's third-biggest retailer, is expected to slip back to an underlying sales decline in its British home patch when it publishes quarterly trading on Wednesday, raising new questions over its recovery strategy.
Britain's biggest grocer is still losing ground to rivals despite being 20 months into Chief Executive Phil Clarke's turnaround plan for its main market.
In an interview with the Sunday Times this week, Chairman Richard Broadbent said a turnaround would not be swift and dismissed talk of a management change.
Tesco, which trails France's Carrefour (PAR:CA) and U.S. number one Wal-Mart (NYS:WMT) in global sales, has spent more than 1 billion pounds ($1.6 billion) on store revamps, more staff, new product ranges and pricing initiatives in Britain.
Meanwhile overseas markets that once provided a hedge against weak demand at home now appear to be more of a hindrance.
After failed attempts to break into Japan and the United States and a costly, still unprofitable, expansion into China, Tesco's sales are falling in central Europe and other Asian markets.
In Britain, the latest monthly industry data showed that in common with other major grocers, Tesco is being squeezed by discounters Aldi (ALDIEI.UL) and Lidl (LIDUK.UL) and upmarket grocers Waitrose (JLP.UL) and Marks & Spencer (MKS.L).
Analysts expect Tesco's sales to have fallen 1 to 2 percent at UK stores open more than a year, excluding fuel and VAT sales tax, for the 13 weeks to November 23, its financial third quarter, with an average forecast of a 1.7 percent drop.
That compares with flat like-for-like sales in its second quarter and a 0.6 percent decline in the same quarter last year, and will raise questions over the sustainability of a 5.2 percent operating margin for the UK business that still contributes over two-thirds of group revenue.
With Tesco's UK sales falling and other costs rising some analysts say it is only able to hold this operating margin by squeezing suppliers for better terms.
However, Tesco has said the changes it is making to its non-food offer, like selling a bigger proportion of higher- margin clothing, is benefiting its overall UK profitability.
Earlier this month Wal-Mart Stores' (NYS:WMT) Asda, battling with J Sainsbury (LSE:SBRY) to be Britain's No. 2 grocer, reported a 0.3 percent rise in third quarter like-for-like sales, albeit for a different time period.
PROFIT FORECASTS CUT
On Tuesday both of Tesco's corporate brokers, Deutsche Bank and Barclays, cut their forecasts for the retailer's profit in 2013-14 by 3 percent.
Analysts' average forecast for group trading profit in 2013-14 is 3.39 billion pounds, down from the 3.45 billion pounds made in 2012-13, according to Tesco's website.
Clarke is likely to highlight a weak UK grocery market and a continuing squeeze on shoppers' incomes with inflation outpacing wage growth.
Tesco has suffered more than many rivals because it sells a higher proportion of non-food goods, like big electrical items and homewares, where shoppers have cut back the most.
In October, Tesco posted second-quarter like-for-like sales declines in all nine of its continuing overseas markets.
Analysts expect a further deterioration in most markets, most notably in South Korea, Tesco's biggest overseas market, and Thailand.
Some improvement is forecast in Poland, reflecting management action in the first half of the year.
(Reporting by James Davey; Editing by Erica Billingham)